Thursday, January 12, 2006

Investor Activism on Political Giving

While the Republicans in Washington have gotten religion in the cause of lobbying reform, another influential group -- institutional investors -- have entered the fray. The Financial Times reports that pension funds are pressuring six companies to disclose all political contributions. Leading the charge is New York City comptroller William Thompson, who manages $88 billion in public pension funds. The group of public pension funds has filed shareholder proposals to require AmSouth Bancorporation, Chevron Corporation, Cinergy Corporation, Southern Company, Union Pacific and Wal-Mart to disclose all direct and indirect contributions.One would expect that an elected official like Thompson would be inclined to use the power of the holdings he manages to push for changes in corporate policy. But the pressure among institutional investors in growing. Institutional Shareholdholder Services, or ISS, is considering changing its recommended policy on corporate political contributions. ISS, the most powerful investor's organization you never heard of, advises institutional investors on shareholder proposals and proxy votes on corporate governance issues. Its proxy voting guidelines are hugely influential for institutional investors that don't have the time to research the many proposals submmitted to shareholders at annual meetings. ISS guidelines "weed out" proposals on social issues that are not considered to directly affect the interests of investors. For instance, ISS publishes the following recommendation on animal testing:

Generally vote AGAINST proposals to phase out the use of animals in product testing unless:• The company is conducting animal testing programs that are unnecessary or not required by regulation;• The company is conducting animal testing when suitable alternatives are accepted and used at peer firms;• The company has been the subject of recent, significant controversy related to its testing programs.

On the other hand, the ISS endorses shareholder activism on executive pay issues:

Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply:• The total cost of the company’s equity plans is unreasonable;• The plan expressly permits the repricing of stock options without prior shareholder approval;• There is a disconnect between CEO pay and the company’s performance;• The company’s three year burn rate exceeds the greater of 2% and the mean plus 1 standard deviation of its industry group; or• The plan is a vehicle for poor pay practices.

ISS guidelines on CEO pay reflect the consensus among investors that uncontrolled executive pay reflects possible corporate governance problems. ISS guidelines favor proposals on social issues if shareholder value could be affected, which is why it is considering the following change to its proxy voting guidelines:

Current Policy Position: ISS recommends voting AGAINST proposals to report or publish in newspapers the company's political contributions. Federal and state laws restrict the amount of corporate contributions and include reporting requirements.New Policy Position:1) ISS will recommend AGAINST proposals to publish in newspapers and public media the company's political contributions as such publications could present significant cost to the company without providing commensurate value to shareholders.2) ISS will recommend on a CASE-BY-CASE basis on proposals to improve the disclosure of a company's political contributions considering:Recent significant controversy or litigation related to the company's political contributions or governmental affairs, and;The public availability of a policy on political contributions.

The ISS is concerned that corporate political contributions "could impact shareholder value if such activities are not properly overseen." If the ISS adopts this change to its guidelines, it will signal that concerns about big money in politics have become fair game for institutional investors.